A recent SunTrust study of business executives found that 1 in 6 business owners is planning a business sale. However, according to John Warrillow, author of Built to Sell and founder of The Value Builder SystemTM, many owners find it difficult to sell their businesses because the business relies too heavily on their personal involvement. “Without them, their company – no matter how big or profitable – is essentially worthless.”
Whether in building mode or looking to execute a transition, there are steps business owners can and should take now to prepare for a future sale. By making their businesses less dependent on them, owners can ensure that they receive maximum value when they decide to exit.
Develop an “Options Strategy”
“From the day business owners start the company, their guiding philosophy should be to make the company where it can run without them,” says Warrillow, who has started and exited four businesses himself. “Owners need to start with the end in mind. Their long-term goal is to exit the business.
As opposed to developing an “exit strategy,” Warrillow instead advises business owners to develop an “options strategy” and to work to expand the number of options available to them. “The idea is to have as many choices in the future as possible,” he says. “Build systems and a management team around you so that if a buyer comes along, or you decide it’s the right time to get out, you have a sellable business. Or you can transition the business to new management or work part-time.”
Business owners need to ensure they are not synonymous with the company. Buyers will look to find the risks in a potential acquisition. One of the big questions to anticipate is whether business owners have separated themselves enough from the business. Buyers want to ensure that the business will remain viable and can operate profitably, without the current leader. Owners can counter by working to actively reduce dependency with effective processes and a strong team.
Warrillow agrees, noting that buyers who aren’t confident that the business can run without the owner at the helm won’t make their best offer. “If any potential acquirers see the owner as key to wooing new customers, or integral to the success of the business and its growth, they’ll be concerned that business will dry up when the owner leaves,” he said.
Build business independence
To create independence, Warrillow advises owners to demonstrate a business’s broad customer development skills. Where possible, owners can shift their philosophy from selling multiple items to a few customers, to selling fewer things to more customers. “It’s a 180 degree difference in the way they think about their business,” says Warrillow. “With the former, it’s difficult to train employees and bring to scale because employees are always doing something different, and they may have a large dependence on one or two customers.”
Instead, owners need to transition the business to what Warrillow terms TVR (Teachable, Valuable, Repeatable), meaning it’s teachable to employees, valuable to customers and customers repurchase repeatedly. “Owners need to transition to becoming the best widget maker,” he advises. “All employees become widget experts. The business starts to scale beyond just the owner’s knowledge.”
SunTrust Research shows that 10% of business owners are planning to divest parts of their business to improve profitability. Not only does this make the business more attractive to a potential buyer by maximizing profitability, but it also makes the business more specialized, allowing the owners to extricate themselves from personally overseeing each facet of the business. An example Warrillow uses in Built to Sell is that Southwest Airlines only uses the Boeing 737 model of airplane so their crew can learn one piece of equipment and maintenance teams can quickly spot problems with one set of diagnostic routines to follow.
Once a business has specialized, its owners need to resist the temptation to accept business outside their scope. “Stopping yourself from accepting projects outside of your scalable product or service is the toughest part of creating a business that can thrive without you,” he cautions.
After the shift to a scalable business, the owner needs to create a standard process that employees can deliver, train them, and then step out of the process. “Avoid the temptation to get personally involved in selling or delivering your standard offering,” says Warrillow. “One of the mistakes I’ve seen is that business owners fall victim to ego gratification. A customer praises the owner and wants the owner to personally oversee the client’s work. It’s a validating force, and especially prevalent in services businesses. But it undermines the value of the business."
A potential acquirer will generally want to see that owners have a management team that can keep the business running once the owner exits. “An acquiring company wants to see that there is a management layer in place and that the management team will stay after the business is purchased,” he says. He advises owners to create a long-term incentive plan for key managers that will encourage them to stay after the sale. One way to do that as discussed in Built to Sell is to take an amount equivalent to an annual bonus and put it aside in a long-term incentive account. “Allow the manager to withdraw one-third of the account’s balance each year after a three-year period. That way, a good manager must always walk away from a significant amount of money should he or she decide to leave your company."
Building a business that can stand alone should be part of a longer-term plan for the business. A Six Year Plan can help crystallize that vision, guide the business’s overall development and turn that goal into a reality. Then you, along with your SunTrust Relationship Manager, can work to create the company that will be prepared for a successful transition.